In The Budget 2012 George Osborne announced changes to the child benefit cuts scheduled for 2013. We explain what these changes mean for your finances and whether there’s anything you can do to keep your child benefit.
If you had just got your head around the original plans to cut to child benefit, George Osborne’s latest amendments, unveiled in the 2012 Budget, may have left you wondering exactly where you stand.
It’s estimated that these changes will see around 750,000 families keep some or all of their child benefit payments – we examine the plans in detail so you know what to expect when the changes come in.
Previously George Osborne announced plans to withdraw child benefit in full from all higher rate tax payers.
However, these changes were widely criticised as being unfair on single income families and introducing a benefit ‘cliff edge’ for those earning just over the higher tax rate threshold.
This is no longer the case, now, only those who earn over £60,000 a year will lose their child benefit entirely, while people who earn over £50,000 a year will see it gradually withdrawn depending on how much they earn.
If both you and your partner earn under £50,000 a year you will keep all of your child benefit payments.
If either you or your partner earn over £60,000 you will lose child benefit in full.
However, if you or your partner earn between £50,000 and £60,000 you will lose 1% of your child benefit payments for every £100 you earn above the £50,000 threshold – so for example if you earn £55,000 you will lose 50% of your child benefit.
The taxman will take earnings from your main job, any other jobs you have, rental income and anything you earn from savings and investments into account when they're calculating how much you should lose.
The planned changes to child benefit will be implemented on 7th January, 2013.
The government has announced it will write to all higher rate tax payers set to be affected by the change in the autumn of 2012, with details of how much they'll lose.
No, this is the confusing part; even if you earn over the £60,000 payment threshold your child benefit will continue to be paid as normal after January 2013.
Instead, if you’re a higher earner the government will take the equivalent value back through an additional Income Tax charge.
If you earn over £50,000 this additional Income Tax charge will be equal to 1% of your child benefit for every £100 you earn above £50,000.
If you earn over £60,000 this additional Income Tax charge will be equal to your entire child benefit entitlement.
If both you and your partner earn over £50,000, the additional Income Tax charge will be applied to whoever earns the most, regardless of who the child benefit is paid to.
If your ex-partner earns over £50,000 but you receive child benefit for your children you will be permitted to keep the payments in full (providing you earn under the £50,000 threshold).
Equally if you earn over £50,000 but have separated from a partner who claims child benefit for your children you will not have to pay the additional Income Tax charge.
If you and your partner separate after the change takes effect you will no longer be liable to pay the additional Income Tax charge. This will take effect from your date of separation, rather than the end of the tax year – so you will need to inform HMRC accordingly.
If you want to avoid the additional Income Tax charge, or don’t want your partner to have to pay the tax because you receive child benefit, you can opt to stop your child benefit payments by notifying HMRC.
If you do this you should still complete a child benefit application if you have any more children, even if you don’t want to claim child benefit for them.
This is because your child benefit entitlement affects whether you qualify for National Insurance credits and could affect whether you will be able to claim a full state pension.
For more information about National Insurance credits visit the HMRC website.
The only way to reduce the amount your additional Income Tax charge you need to pay while keeping your child benefit is to reduce your taxable income.
This can be done by making additional payments into any personal pension, or by purchasing childcare vouchers; both of which qualify for tax relief.
However, while the original child benefit cuts would have seen higher rate tax payers just over the threshold lose thousands of pounds worth of income, the gradual charge applied through the additional Income Tax charge makes this a much softer and gradual process.
Consequently the benefit of paying extra into a pension or purchasing childcare vouchers are less pronounced than before (though potentially still worth doing).
For those that earn between £50,000 and £60,000, paying an additional £100 into your pension each month will only equate to a 1% reduction of your child benefit via the Income Tax charge.
If you don’t already pay into a pension, then this could be another incentive which could make saving for your retirement more appealing. Read our guide: Should I get a Pension? for more help deciding your best options.
Equally, if you are paying a considerable amount in childcare costs, purchasing childcare vouchers would again see you face a smaller additional Income Tax charge as well as benefitting from the other tax perks available with childcare vouchers.
Read our guide How to Get Help with Childcare Costs for more information.
Depending on your circumstances, terms of employment and the additional Income Tax charge you face, registering as a private limited company could help you avoid the upcoming child benefit changes.
This essentially involves creating a private limited company to cover your work, paying yourself a minimum wage salary and declaring the rest of the money you earn each year as a dividend.
However, while this appears to be an ingenious way to avoid paying higher rates of tax it is only really a viable option for the self employed, freelancers or consultants not directly employed by a single company.
If you are a full time employee of a single company with a fixed annual salary this just isn’t an option, and is in fact illegal.
Even if you do fit into the right employment category, registering as a private limited company and altering your personal tax liabilities so drastically is not an easy option and should only be done with the aid of a qualified accountant.
I think that people wether in a couple or single parent that earns over 50,000 should have benfits cut as surely in this day and age u can survive on 50,000 and if you can not then may be the lifestyle you lead should be cut back on. There are so many families out there that are working but that can only pay their bills and that dont have any thing left over to do any thing on weekends so why should people that earn alot of money have more money from the goverment!
The completely immoral thing is I know so called self employed including Accountancy Partners who actually earn hundreds of thousands per annum but because they can manipulate their income and pay the majority as a dividend they will not only keep the benefit, get higher tax relief on mortgages for their mansions and pay 10% tax on their income. How the hell is that fair against those on PAYE earning a fraction of what they earn. Wake up Government, civil servants and HRMC!
Softer or not, the changes still seem to be grossly unfair to the single earner of over £50,000 in a married partnership where the partner is "unemployed". If an employer could be persuaded to reduce the earner's salary beneath the threshold and pay the balance to the "unemployed" partner as a childcare or personal assistant allowance, would this be illegal? After all, it seems two partners each earning £49,000 are still exempt from reductions of allowance or increased taxation. This is unjust in anyone's language, surely. Dyknor
I have two children, receive no maintenance from their father (self employed get out clause) my new husband earns 59K but has three children from previous marriage which he totally supports so 25% of his income goes to his first family plus spousal maintenance, his ex wife household income will bring in more than us if you count the maintenance/s she gets and she will continue to be eligible for family allowance, whereas I will not be eligible to get it for my children yet we will have a much lower income availability, it seems very unfair the way it has been worked out and that it hasnt been worked out on household income. Will they take into consideration maintenance income and deductions? I guess not, I do not see how this system is fair.
It would be good if one of the political parties in opposition could gather the votes on the 1 million or so affected single earning families behind them.
This make wake a government up that talks about family life and stability and then seeks to destroy it at every turn!!
Can anybody tell me why the government are cutting child benefits for those families where ONE individual earns over 50k and for other families where both partners earn under 50k, ie 49k get to keep it? I would like to meet the mathematician who worked that one out! The best way to make a saving in 2013 is to get divorced. Again, how can decisions like this be justified? Firing from the hips comes to mind!
What is the impact of the fact that this charge is only applying from January 2013, ie with only about a quarter of the tax year left? Does it mean that for 2012/13, the adjusted net income is calculated in the usual way, giving rise to a percentage reduction, but that ONLY the child benefit payable from January 2013 to 5 April 2013 is subject to the charge?
Hi I wonder if anyone might know the answer to this query please? I have been separated from my ex-husband for the last 10 years. We have joint residency of our child. For the last 10 years ex-husband has been receiving the Child Benefit but it appears he has now opted out of receiving it because of the amount of money he earns. Is there any chance that as I have a very low income I might instead be able to receive the Child Benefit?
the two eldest sons of mine.
The eldest earns above the limit just & his wife, my d-in-law does a wonderful job bringing the children up. loses there famly allowance.
The younger son & his wife both earn near the limit & they keep the family allowance.
Now wheres the sense or fairness in this system ?.
This year has been a good year for my earnings. £62000 probably by April. My job is coming to an end and i am being taken off shift work so my gross pay will reduce to about £40000 next year. I have 3 kids so not only am I losing my well paid job I am also going to lose £2500 in child benefit. Can I dispute my case with HMRC and perhaps claim some child benefit?
My argument is the people who are agreeing with the GOVT, and would bet my life savings that these are people who are both earning good salaries but are under the threshold of the tax exempt. I do not agree that one person on the household could earn £65000 a year and loose the child benefit, but a couple earning say £45000 each (£90000 total) gets to keep it. There would soon be an uproar if the government said it was a combined household of £60000+